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Why Varian Medical Systems Is Tanking Today

By Brian Feroldi - Jul 25, 2019 at 4:03PM

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Shares slump after the radiation-therapy company reported mixed quarterly results.

What happened

In response to reporting fiscal third-quarter results, shares of Varian Medical Systems (VAR), a leading provider of radiation-therapy products, slumped as much as 10% on Wednesday. Shares were down about 9% as of 3:32 p.m. EDT.

So what

Here's a look at the key numbers from the quarter:

  • Revenue grew 16%, to $826 million. This was substantially ahead of the $760 million in revenue that analysts were expecting. It was also negatively impacted by $10 million, due to the U.S/China tariffs.
  • Generally accepted accounting principles (GAAP) earnings were impacted by a $51 million goodwill impairment charge and $31 million in acquisition costs.
  • Non-GAAP earnings per share were $1.32. That was ahead of the $1.14 that Wall Street was expecting.

Management also tweaked its full-year guidance:

  • Revenue is now expected to grow 9% to 10%. That's ahead of the 8% growth that analysts were expecting.
  • Non-GAAP earnings are expected to land between $4.58 and $4.63. This is down from its prior forecast of $4.55 to $4.75. It's also below the $4.69 that Wall Street was modeling for the full year.
  • Cash flow from operations is now expected to land between $430 million and $470 million. That's a decline from management's prior range of $440 million to $490 million.
Arrow pointing up and down with question mark

Image source: Getty Images.

Traders appear to be looking past the upbeat quarterly numbers and are focusing on the downward revision to full-year earnings per share. 

Now what

Varian's stock was trading for more than 30 times trailing earnings prior to this release, so it makes sense that shares are selling off in the wake of a mixed earnings report. What's more, the consensus estimate on Wall Street calls for earnings to grow about 8% annually over the next five years, which is a modest growth rate for a company that's trading at a premium to the market.

My view is that Varian is a fine company but growing far too slowly to attract my attention. I plan on focusing my time and capital on healthcare stocks with more attractive opportunities ahead.

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